The Archbishop and the Economist

>St Andrew’s Trust for the Study of Religion and Society 24 October, 2013

Keywords: History of Ideas, Methodology & Philosophy;

Those who founded this venerable church, more than 160 years ago, might be a little disturbed that the Archbishop of Canterbury should be introduced into it. However my intention is not so much to be ecumenical as to recall a debate in economics of a mere 60 years ago, in which the ethical dimension of an economic question was symbolised by the Archbishop. In a different context it could have been a Moderator, the Vicar of Rome or, for that matter, a Chief Rabbi, an Imam, a leader of any other religious faith or even the minister of your local church. The point is that such people have an ethical comparative advantage over economists.

The incident which precipitated the issue involved economist Dennis Robertson. Although not well known today – I used one of his textbooks as a student – he was an eminent professor of economics at the University of Cambridge in the 1930s, when it had the most important economics department in the world, and he was knighted for his services to economics. It may also be relevant to mention that Sir Dennis was the son of an Anglican clergyman.

Among his contributions to economics was an article Utility and all That in which he pondered on the issue of interpersonal relations in welfare economics. From early days economics has been based on the utilitarian assumption that greater consumption generated higher welfare. There are a number of caveats to this conclusion, which economics takes into account. But as a general rule we assume a person is better off with higher income. The justification for using per capita GDP arises from this assumption.

The problem which concerned Robertson was what if a rise in one person’s income made other people feel worse off. This is an example of what economists call interpersonal utilities. Your own feelings of wellbeing – of happiness – depend up the feelings of other. Envy is a particular example; your feeling of wellbeing goes down if others are happier.

Where envy was widespread, it was possible that, in a certain sense, a rise in one person’s income could reduce the welfare of the public at large. What were economists to do? In his 1954 paper Robertson argued that economists should

assert as a plain matter of fact that economic welfare undoubtedly will be increased [in the event of some receiving higher incomes], then … call in the Archbishop of Canterbury to smack people over the head if they are stupid enough to allow the increased happiness which might be derived from this plain fact to be eroded by the gnawings of the green-eyed monster.[1]

As an aside, if economists are to discount envy, are they not also to discount altruism? My theme is that interpersonal utilities – envy and altruism – generate the most profound problems for economic analysis. For instance, another eminent economist, James Tobin, has shown that the standard propositions about how the market works are not true where there is widespread envy or altruism. In particular, self-seeking does not necessarily lead to the public economic benefit.

If pressed, most economists would mutter that a rising tide lifts all boats, and if everyone had a higher income there would be no increase in envy but there would be a rise in general welfare. Robertson would have added some caveats but would not have been uncomfortable with that conclusion. In summary, economists are driven by a belief that ‘more means better’.

Observe that the issue here is one of the normative economics of welfare comparisons, of how we evaluate economic outcomes. It does not ask whether envy and/or altruism is a significant factor in economic behaviour – whether the Archbishop’s bouts of head smacking have had any effect.

Until recently economists would have been unsure even how to investigate the question. However in the postwar era, and especially in recent years, data has been collected which throws some light on the issue.

Suppose you ask people whether they are happy. The reply involves a subjective response and economists are uneasy about such subjectivity. But there are other measures of happiness, including biological ones, which show similar patterns to that which I am about to report, so I think we can proceed on the basis that self-rated subjectivity reflects some objective reality.

What do the replies to the question generally tell us? There are lots of fascinating results including:

– Happier countries tend to be richer countries.

– More important for happiness than income are social factors like the strength of social support, the absence of corruption and the degree of personal freedom.

– Unemployment causes as much unhappiness as bereavement or separation.

– At work, job security and good relationships do more for job satisfaction than high pay and convenient hours.

-Behaving well makes people happier.

– Mental health is the biggest single factor affecting happiness in any country.

– Stable family life and enduring marriages are important for the happiness of parents and children.

– In advanced countries, women are happier than men, while the position in poorer countries is mixed.

– Happiness is lowest in middle age. [2]

I’ll come back to these later. Initially I am only going to focus on two major findings.

The longest series we have on happiness is from the United States. Since 1946 they have been asking people whether they are happy. The survey is a consequence of Congress responding to the Declaration of Independence which states that ‘all men … are created equal [and] are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.’

So for 70 odd years Americans have been dutifully carrying out the surveys. In that time per capita GDP has risen more than three times. In contrast average responses to the happiness question are much the same today as they were in 1946. Although their data is over a shorter period you get much the same conclusion for other rich countries. Despite rises in real incomes over time, there is no corresponding rise in people’s self-assessed happiness. More does not seem necessarily better.

Yet, apparently paradoxically, if you ask a group of people at any point in time whether they are happy you find that those on higher incomes say they are happier and those on lower incomes are less happy. So if my income goes up I am happier, but if everyone’s goes up, I am not.

Such a conclusion is threatening to the conventional wisdom. Inevitably it has been challenged. Some of the challengers are simply deniers who say the finding cannot be true. The more sophisticated argument is that the question is misleading, but methodologically however, their argument is circular because they do not draw on independent evidence but implicitly assume its truth and then prove it.

One empirical argument is whether it is true that communities with higher incomes are, or are not, happier. It turns out that in poor countries rises in average incomes are associated with greater happiness. So as, say, Bangladeshis, who live in one of the poorest countries in the world, get richer they also get happier. That contrasts with the rich United States which has not had a rise in average happiness for as far back as we can measure, despite rising incomes.

We can resolve the paradox by concluding that if a community is really poor, its members do feel happier as their standard of living rises. If your food, clothing, shelter is inadequate you do feel genuinely better if you have more of them. But at a certain threshold when adequacy is reached, additional consumption does not add to your happiness. In mathematical terms the relationship between happiness and incomes is non-linear: rising when incomes are low and cesign to rise when incomes are high.

Note that, when the foundations of the economics discipline were laid in the nineteenth century, even in Britain – then the richest country in the world – many people’s consumption was far from adequate, and it is a reasonable hypothesis that more meant better for them. But British living standards have since well passed the threshold and they, like the US, dont get a boost in happiness from a boost in income. Nor do we.

How high is the threshold? It is difficult to measure exactly and it may change over time. But currently it appears to be about two thirds of average New Zealand incomes. So we join the US and Britain – and indeed most OECD countries – in that higher average incomes do not raise average subjective welfare.

Because some poor countries have moved up closer to the adequacy threshold the world seems to have become a little happier in the last 30 years. Economic progress seems to have done some good.

The remainder of what I have to say today is about these rich countries above that threshold. With one exception. There is nothing I am about to say which changes such obligations we have, or may think we have, to enable people in poor countries to have a standard of living above the threshold – to get them to the state that when their income increases they remain about as happy on average.

So I return to my main theme: in rich countries more for everyone does not seem better – certainly not happier. However, another paradox, to have more relative to others in your community does increase one’s happiness.

As a result people will strive to lift their incomes relative to their fellows. But not everybody can do that. Ironically if we all succeed in raising our income we are not all happier. It’s a bit like when we used to sit on benches at rugby matches. When the game got exciting we all stood up, to see better but, of course, if we all stood up we did not see any better. Similarly if we each stand up for a high income to make us happier, we do not seem to get any happier.

But, and this seems crucial, I have just described a mechanism which generates material economic growth raising the material standard of living. People strive to improve themselves and that raises material standards of living. The difference of the story I am telling from the economic orthodoxy, which goes back at least 250 years to Adam Smith, is that the rise in material standards no longer seems to increase general welfare. You now have a sense why many traditionally trained economists are so vehement in their dislike of the outcomes from the happiness research.

Why are people on higher relative incomes happier than those on lower relative incomes? Twenty years ago some of those then on relatively high incomes had a material standard of living comparable to the income of those who today are relatively poor. Twenty years ago the income made a person relatively happy, today exactly the same standard of living makes a person relatively unhappy.

One mechanism to explain this strange state of affairs is the Robertsonian one of envy. People on high incomes are happy, and people on low incomes would be as equally happy if they were not envious of those better off than they are. If this were true the Archbishop should smack them all on their heads, thereby curing them of envy – with the result that their happiness would rise (presumably as soon as their headaches were over).

But there exists another – not unrelated – explanation. Perhaps incomes are associated with social status. A high income has others looking up to the rich, giving them attributes which are not justified by any talent they have but by the high incomes they have. Remember Tevye, from Fiddler on the Roof singing about if he were a rich man:

The most important men in town would come to fawn on me!

They would ask me to advise them,

Like a Solomon the Wise.

‘If you please, Reb Tevye…’

‘Pardon me, Reb Tevye…’

Posing problems that would cross a rabbi’s eyes!

And it won’t make one bit of difference if I answer right or wrong.

When you’re rich, they think you really know!

Certainly many of our rich who are not loathe to impart their wisdom to us all– trite and self serving though it may be – apparently on the basis that wealth gives them special insights. (I must add, however, that celebrities of any hue make the same claim – not just those exceptionally well off).

Because ‘money’ enables one to exercise public power and to purchase acquiescence, those who possess more of it have a status in society. Given that higher status generates higher self esteem the rich are happier. But as Bob Dylan reminds us, money does not talk, it swears.

Of course the rich have to demonstrate their wealth. I can remember the time – say 30 years ago – when it was not polite to boast about it. There were still huge houses but they were then hidden behind modest fences and – as I understand it – such people made generous donations but they were anonymous.

The acceptable way of establishing in public that one was well-off was by grumbling that one paid an awful lot of income tax. When top income tax rates fell the grumbling ceased – after all, given the generosity of the tax cuts to the rich, it would be impolitic to draw attention to them, especially as the main argument today is that high income tax rates encourage the well-off to avoid their public responsibilities. New ways had to be used to display one’s wealth.

We do not know the exact mechanism which led to the change, but it is evident that about a quarter of a century ago, conspicuous consumption became more common. Houses became ostentatious – the most ostentatious had two of them; trophy wives in expensive fashionable clothes began to appear in our gossip magazines; Gatsby parties were thrown with much media attention. More honourably the rich continued to make large donations to worthy causes. Most notably this is supporting creative activities (although, unlike in other countries, little is given for the promotion of a high quality public debate – which may explain why the nation is doing better in the arts and literature than it is intellectually). But unlike the past practice the generosity was accompanied by prominent mention of the donors’ names.

More generally, my impression is that not only did the policy changes of that period make major changes to the way the economy operated but there was also a change in society. It had not been well explored. Economists can only go so far and sociologists have not really started to address it. We know there was a large step up in inequality but my impression is that there was also a change in the texture of society as well, although other phenomena, such as the rise of the earning mother and the consolidation of the urban Maori, also had a major impact.

The economist qua economist observes the rise of conspicuous consumption and allied changes as a fact about economic behaviour. Perhaps they may feel a little more inhibited about applying welfare economics – or even to assume that more means better – but ultimately it is a shrug of the shoulders and the laconic ‘that is the way things work’.

At which point the Archbishop or some other religious leader steps in. A good place for them to start is to ask how it is that we value some people’s economic effort more than others? Economists might respond by pointing out that there is a difference between value and price; the facts are that some people’s work effort is remunerated more by the market than others, they are paid a higher market price, but that is not the same thing as value.

But, says our Archbishop, why do we pay the head of the Ministry of Health more than those who look after our elderly in residential homes? Surely the carers are doing more valuable work than the administrator.

Economists have thought about this problem a lot, albeit with a different example. Even as an economic student I was confronted with the question of why we value diamonds more than water, whereas the water is obviously more valuable to wellbeing.

It is partly a consequence of playing on two meanings of the word ‘value’. I could rephrase the question: why is the price of diamonds higher than the price of water? To simplify, the answer is that diamonds are scarcer than water, just as senior administrators are scarcer than residential home workers. Their price reflects their scarcity, not their value.

I am just about to explain the alternative meaning of the word, when the Archbishop jumps in asking why then do we equate ‘price’ with ‘value’? The short answer is that 200 years ago, economists were confused by the two terms and lumped them together. Even today, in the jargon of the profession, what should be called ‘price theory’ is still called ‘value theory’. Everyone else was equally muddled. But while economists got the issue sorted out just over 100 years ago, the general public still has not.

Our Archbishop persists. Then why do we equate value with price? Does it mean that high-priced workers contribute more to society than low-priced workers – and so they are more valuable? A well-trained economist gets very embarrassed at this point. It turns out that there is a sense in which high-priced workers contribute more to the economy – which is, of course, not the whole of society, Your Grace, because that is more encompassing than just the economy. However the justification is circular; the theory slips in the assumption that workers are valued at their price.

Economists cannot properly equate value (in this sense) with price without adding an assumption which does not come from economic science. The point is, Your Grace, that economists can progress the analysis only so far, but they have reached the point where they can go no further.

The Archbishop looks puzzled. He says that this is not what he hears in the public debate. Well, many who pronounce on the economy are not trained economists. It’s a bit like in religion all sorts of untrained experts pronounce on eternal truths, quite unaware of the subtlety of theological discourse. Do I see the Archbishop smile? Many in the economic debate are self-seeking, or representing the interests of those who pay them. Sadly too, the issues I’ve been raising are so hard that they are put aside. My impression is that many of today’s economists are not taught them; certainly we do not teach methodology as we once did. It is a bit like getting a religious training without much theology.

So we just take it for granted than more means better, that the purpose in life is happiness from higher material standards of living. Your Grace may want to challenge that assumption.

Actually there was a major economist who did. But he was also a very important philosopher. It was in that role I first read John Stuart Mill. About 150 years ago he had been asked by the utilitarians, who included his father, to provide a rigorous foundation for the theory, which argues the aim should be greatest happiness for the greatest number of people. In the end Mill undermined the Utilitarian’s theory when he wrote:

It is better to be a human dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied. And if the fool, or the pig, are of a different opinion, it is because they only know their own side of the question. The other party to the comparison knows both sides.

Economists found that Mill’s challenge so difficult that they have tended to keep to happiness as an objective. You could argue the Rogernomic changes twenty-five years ago were predicated on producing happy pigs. (Whether the pigs ended up any happier is a matter for another occasion.)

So allow me, Your Grace, to continue with the notion that the ultimate purpose is happiness, although when you come to lecture here in your own right, I shall be all ears as to what might be a better purpose and how economists might contribute to it.

Let me go back to the research which listed the correlates with happiness. There are certainly some others but we dont have the evidence to be sure of them. Here are those factors which affect happiness which we do know about, in a slightly different order.

First, we know that age and gender matter, but even Archbishops cannot do a great deal about them;

Second, there are factors like the strength of social support, the absence of corruption, the degree of personal freedom, stable family life and enduring marriages, behaving well and quality mental health. These are all factors to which archbishops may make a contribution but economists certainly do not.

Third, job security and good relationships at work do more for job satisfaction than high pay and convenient hours. Important issues which we can do something about, although modern economic theory may not be much help because it says that pay will compensate for poor job security and work relationships; there is not a lot of evidence that it does.

The final group of factors which affect wellbeing are unemployment and sufficient income to provide an adequate standard of living. These are economists’ concerns. But as I have explained, already in rich countries we have generally hit the threshold of an adequate income. So all that leaves economists to focus on is unemployment – except, of course, to tell the world what is going on (something we are very good at, providing you do not look at our past record).

Now you may think that the economic conclusion from all this is that rich countries should give up economic growth since it is not contributing to their people’s happiness. I’m afraid, it is more complex than that.

First, as I have already explained, economic expansion is driven by individuals striving to better themselves. Suppose New Zealand was to give up economic growth. Then some – many? – New Zealanders would go overseas to strive there. Humiliatingly they would come back and, to boost their self-esteem, they would lord it all over us as to how well they have done – as already happens.

So we cannot avoid the world outside. But suppose world economic growth stopped – let us not forget there are billions below that standard of living threshold, so we would be condemning them to eternal unhappiness. However science would continue to progress and the resulting technology – new scientific applications – would continue to raise productivity and perforce reduce employment. This could mean more leisure but almost certainly the impact would be uneven and unemployment would occur for some, reducing their happiness.

Now I am not saying that economic growth is inevitable. There have been alarms about the world running out of resources and stagnating – or worse – going back to Thomas Malthus. In the following two hundred plus years it has not happened, primarily because technological progress has found substitutes for the scarce resources. Obviously one day Malthus is going to be right, but we dont know when.

A more serious immediate possibility for the rich world is that while productivity continues to rise, real incomes do not because the relative prices for their products fall. The good news is the beneficiaries from the fall will be many of the poor countries.

Do I hear the Archbishop saying with exasperation, ‘once more you economists are going on about the next world, mainly because we cant know whether you are right or wrong and when we do find out you will be forgotten. What I have to deal with is the here and now.’

I think what the economics says about the present is that we have to be a lot more careful about evaluating progress. Some makes us better off and we need to give a greater focus on them than just promoting more material production. One example is improved health care, another is in creative activity.

More generally, another great economic philosopher, Amartya Sen, has argued that we should pay more attention to what he calls ‘capabilities’ – life choices. Certainly a society which stunts the future opportunities of so many of our children could be improved considerably. Because we are running out of time I have to leave that for another day.

So what is the role of an archbishop? The message is that the economy needs more moral leadership. I dont mean the technical discussions of what is happening. Rather economists need more help on how we are to evaluate the performance of the economy. And so does the public.

They, as well as economists, have trapped themselves into thinking what matters is material output – that more is better. However, whatever is the purpose of existence, economic growth in an affluent society is probably not closely related to it Even so economic growth will happen to some extent and it would be sensible to harness it for the higher purposes.

So, Your Grace, you might emphasise that the measure of man – or woman – is not their income. It may well be more important how they spend it, especially how much they give to others including through taxation to the public chest, for often that is the best way to raise public wellbeing.

An earlier religious leader – you will know Jesus’s teachings, Sir, but how little they impact on modern society – told the story of the widow’s mite.

Jesus sat over against the treasury, and saw how the people cast money into the treasury: and many that were rich cast in much.

There came a certain poor widow, and she threw in two mites.

He called to him his disciples, and said ‘truly this poor widow has cast more in, than all they which have cast into the treasury:

For all they did cast in of their abundance; but she of her want did cast in all that she had, even all her living. [3]

The Archbishop has a puzzled smile. ‘You are really arguing for interdependent utilities are you not, Brian’?

‘Yes, Your Grace, but the opposite way around to that which concerned Robertson. Against envy and for altruism.’

‘But you said, Brian, that would muck up economics.’

‘So be it. We should not run the world to suit economists. The purpose of life is not set by them. Our role is to understand the economy but also to help it meet society’s needs. Others have to determine what those needs are. We are servants not masters.’